LAUR

Business Context and Reporting Period

Company: Laureate Education, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: Laureate operates a global network of licensed campus-based and online higher education institutions across Latin America, Europe, and the United States. The company serves over 243,000 students through three reportable segments: Campus Based - Latin America, Campus Based - Europe, and Laureate Online Education. The business model focuses on career-oriented undergraduate and graduate degree programs.

Key Financial Metrics (Year Ended Dec 31, 2006)

Segment Performance (2006):

• Latin America: Revenue $687.4 million; Segment Profit $149.2 million.
• Europe: Revenue $223.8 million; Segment Profit $27.6 million.
• Laureate Online Education: Revenue $234.6 million; Segment Profit $43.3 million.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 31% to $1.146 billion, driven by a 36% increase in Latin America revenue (due to acquisitions of UAM and UNITEC and enrollment growth) and a 27% increase in Online Education revenue.
• Profitability: Operating income rose 13% to $148.4 million. Net income increased 39% to $105.6 million.
• Debt Expansion: Long-term debt increased significantly from $163.0 million in 2005 to $423.4 million in 2006. This was primarily due to the entry into a new $350 million revolving credit facility and borrowings to fund acquisitions (including the step-acquisition of Chilean operations and UVM).
• Accounting Changes: The company adopted SFAS 123R (share-based payment) and changed revenue recognition policies for campus-based tuition to a weekly straight-line basis. Additionally, the company reevaluated accounting for minority share ownership purchase arrangements, resulting in a $4.2 million reduction in earnings available to common shareholders.

Guidance, Outlook, Risks, and Unusual Items

Proposed Merger: On January 28, 2007, Laureate entered into a definitive agreement to be acquired by Wengen Alberta, Limited Partnership (a consortium including CEO Douglas L. Becker and private equity firms) for $60.50 per share in cash. Completion is subject to shareholder approval and regulatory conditions.

Management Outlook: Management anticipates continued growth through enrollment increases, tuition adjustments, and strategic acquisitions. The company plans to expand capacity and enter new geographic markets.

Key Risks and Contingencies:

• Internal Control Weakness: The company identified a material weakness in internal controls over financial reporting related to the accounting for income taxes. This resulted in an adverse opinion from auditors on the effectiveness of internal controls, though the financial statements received an unqualified opinion.
• Foreign Currency: Approximately 81% of revenue is generated outside the U.S. A 10% adverse change in exchange rates could decrease operating income by approximately $20.5 million.
• Regulatory Environment: Operations are subject to varying regulations in multiple countries. Changes in laws regarding private education or foreign ownership could adversely affect the business.
• Legal Proceedings: Two civil actions were filed challenging the proposed merger. Additionally, the company is involved in a dispute regarding Italian VAT assessments related to the former WSI business, having deposited $3.0 million as a partial payment while contesting the liability.

Investor Verification Checklist

• Merger Status: Verify the progress of the $60.50/share acquisition by Wengen and the likelihood of shareholder/regulatory approval.
• Debt Covenants: Review the terms of the $350 million credit facility and ensure compliance with leverage ratios (max 3.5x EBITDA) given the increased debt load.
• Internal Controls: Assess the remediation plan for the material weakness in income tax accounting and its potential impact on future reporting accuracy.
• Minority Put Obligations: Evaluate the potential cash outflow if minority shareholders exercise put options on acquired universities (potential obligation of $80.7 million if all exercisable).
• Acquisition Integration: Monitor the financial performance and integration of recent major acquisitions, specifically the Chilean operations (Decon/Desup) and UVM.